This was among a series of developments yesterday that included settlements with three fund companies caught up in the regulatory probe, and criticism of Canada's top securities regulator for not imposing fines against them.

Franklin said it has received a letter from OSC enforcement staff, alleging that the company permitted market timing in certain funds it managed over a four-year period, beginning in February, 1999.

The company said it plans to co-operate with the OSC. The company "is, and always has been, fully committed to protecting the best interests of our investors and the investing public," it said.

OSC enforcement director Mike Watson said Franklin is the only company that received a letter yesterday. He said he will not know whether further letters will be sent until the regulator completes its review of a "very small number" of fund companies.

The OSC said I.G. Investment Management Ltd., CI Mutual Funds Inc. and AGF Funds Inc. have struck settlement agreements with commission staff over allegations that they failed to protect investors from the "significant harm" that frequent "market-timing" trading can inflict on a fund.

The agreements will be presented to a commission panel for approval at a hearing on Thursday.

A fourth company, AIC Ltd., is in settlement talks with the regulator.

The proposed settlements are the culmination of the largest investigation undertaken to date by the regulator, Mr. Watson said.

"It was a long, drawn-out process . . . But the negotiations remained positive throughout, and we have reached a position which we think is an appropriate one that looks out for the best interests of the public."

At issue is the controversial practice of market timing. It involves rapid, in-and-out trading by hedge funds and other market professionals to take advantage of time-zone differences in international funds, where events after overseas markets close often make stock prices in the funds out of date.

Market timing is unfair to long-term investors because it is their money that has generated the profits in a given fund. When market timers jump in and out, they reap a chunk of the profits that would otherwise be in a fund, reducing the value of the pool that would be held by all investors.

A Report on Business investigation published in June found that rapid, in-and-out trading in mutual funds totalled more than $220-billion between 2000 and 2003.

The conduct of I.G. Investment, a subsidiary of Investors Group Inc., CI and AGF in failing to fully protect the funds they manage from the impact of market timers was contrary to the public interest, commission staff allege.

Investor advocates criticized the regulator for not explicitly alleging that the three companies allowed market pros to engage in market timing in their funds.

"They're dancing on the sidelines of the issue," said Glorianne Stromberg, a former OSC commissioner and author of a landmark report in the mid-1990s calling for sweeping reforms of the fund industry.

Others said the fund companies should face fines in addition to paying restitution to investors. Companies implicated in the market-timing probe are expected to pay about $200-million to investors as part of the settlements.

"The real issue here is the breaking of the bond of trust between mutual fund managers and investors," said Ken Kivenko, an investor advocate and author of a mutual fund newsletter. "In my opinion, all [fund] trustees that permitted this should be sanctioned."

All three fund companies have been accused of not implementing appropriate measures to protect their funds from the harm caused by market timers. In every case, the companies took steps that reduced, but did not negate, the costs incurred by a fund as a result of trading done by the market timers, according to the OSC's statements of allegations.

The statements also allege that certain investors profited from market-timing strategies pursued in certain funds managed by CI and AGF. At I.G. Investment, one institutional client allegedly profited from market timing.

The commission says a mutual fund manager has a duty to act honestly, in good faith and in the best interests of a fund. In carrying out that duty, a manager must take steps to protect a fund from the potential for harm to a fund from market timers, the commission asserts.

The wording is from section 116 of the Ontario Securities Act, which spells out a fund manager's fiduciary duty. However, the regulator stopped short of accusing fund executives of violating their fiduciary duty to investors -- an allegation that could have opened the doors to lawsuits against the companies, lawyers said.

The regulatory investigation into market timing in Canadian mutual funds has rocked Canada's powerful but staid $473-billion industry. Securities lawyer Stephen Erlichman said yesterday that much of the controversy could have been avoided if securities regulators had adopted a proposal he made four years ago to have fund companies introduce compliance plans.

He said regulators should have taken a hard look at practices four years ago when market-timing-related problems arose in segregated funds managed by Transamerica Life Insurance Co. of Canada and Standard Life Assurance Co.

Transamerica agreed to pay $6.2-million in restitution to investors; Standard Life quietly fired 13 employees in its Montreal head office after uncovering a trading scheme.

"These things shouldn't have gone on," Mr. Erlichman said, referring to the market timing in Canadian mutual funds. "Everybody had their eyes opened in 2000 about market timing in segregated funds."